"To get rich is glorious." -- Deng Xiaoping. This is perhaps the smartest thing ever uttered by a member of the Communist Party.

Friday, February 17, 2012

Winship on income mobility and inequality

The Brookings Institution's Scott Winship recently testified before the Senate Budget Committee on the subjects of income mobility and inequality. Some highlights:

My own estimates suggest that upward mobility from poverty to the middle class among today's late twentysomethings is about what it was for the previous generation. Roughly 50 to 55 percent of those who started out poor reached the middle class by age twenty-seven. The exception to this pattern of minimal change in mobility is that upward mobility in the absolute sense of being better off than one's parents has risen. For instance, I estimate that 47 percent of late twentysomethings today have already outpaced the incomes their parents had when the kids were 15 years old. In the previous generation, just 41 percent did. In short, if the benchmark against which we judge our mobility is past levels, we do not appear to have much of a problem.

...80 percent of forty-year-olds before the recession were better off than their parents were at the same age.

In other words, if we look at income mobility from an absolute perspective -- the only one that should matter -- rather than a relative one, there is really no problem. The vast majority of people are enjoying a standard of living higher than that of their parents.

...Unlike inequality within the 99 percent, inequality between the 99 percent and the top 1 percent has risen a lot (though not just in the United States). The top 1 percent received 24 percent of all income in 2007 compared with 10 percent in 1980. But there is very little evidence to suggest that the gains at the top have come at the expense of other Americans. Income concentration at the top fell quite a bit between 2007 and 2009, dropping down to 18 percent of all income received, but that hardly translated into gains for everyone else. Why should increases in income concentration necessarily translate into losses for everyone else? The size of the economic pie can grow in such a way that everyone gets a bigger slice despite the top getting a bigger share of the pie. Consider that Mark Zuckerberg, founder of Facebook, stands to make five billion dollars cashing out stock options this year. How would the typical American end up better off if the Facebook IPO were to fall through so that Zuckerberg could not exercise his options? Or if the IPO does go through, will the typical worker be better off in 2013, because Zuckerberg will not realize the windfall he did in 2012?

American inequality levels are viscerally bracing, but one still has to make the case that they are undesirable. Consider two men, one of whom makes over 200 times the other. Should we be concerned about the poorer man? What if I told you that the two men in this example are Zuckerberg and poor Mitt Romney (who made just $22 million in 2010)? Romney made over 400 times the typical American household in 2010. Should we be concerned about that household?

Nailed it. If the high incomes of the rich was the result of money being confiscated from the rest of society then income inequality worrywarts might have a legitimate case. But it isn't, and they don't. No one is poor because Bill Gates or Warren Buffet are rich.

...The problem with most discussions of income mobility and inequality is that they do not distinguish between good and bad mobility or between good and bad inequality. A world of perfect mobility, as the researcher/writer Reihan Salam has noted, is "one in which no matter how hard you work to provide your children with every advantage in life, they're just as likely to sink to the bottom of the heap as to rise to the top." No one should find that ideal attractive; some immobility reflects behaviors we want to encourage or discourage. Similarly, in a world of perfect equality, there would be no rewards for hard work or risk. That would cripple economic growth and hurt everyone.

Another excellent point. There is absolutely zero nuance in the discussion over income inequality or mobility. A village where everyone doubles their income and thus produces no income mobility is not bad. A village where everyone lives in equally miserable squalor is not good. Further, to the extent that income is a problem -- think Brazil in the 1980s -- it's not the direct problem but rather the symptom of larger ones. A discussion over these other factors is the one we ought to be having, but then that's not very useful if one's primary objective is lay the intellectual groundwork for raising taxes on the rich or increasing the power of government.

Update: Charles Blow is really upset with recent comments by Rick Santorum on income inequality:

“Santorum Praises Income Inequality.”

That was Fox News’s headline about Rick Santorum’s speech at the Detroit Economic Club on Thursday. Santorum said, “I’m not about equality of result when it comes to income inequality. There is income inequality in America. There always has been and, hopefully, and I do say that, there always will be.”

Unbelievable. Maybe not, but stunning all the same.

While this blog does not count itself as a fan of Rick Santorum, his statement is absolutely 100 percent correct. In a free society income inequality will always exist. Given people's varying levels of talent, ambition, goals and just plain luck, different levels of income is the only logical outcome. In fact, when this ceases to be the case and everyone has roughly the same income, it's a good bet that totalitarianism has taken hold.